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Government Revenue from Seigniorage and Inflation Tax:An Estimate for India 1952-2000


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1 Department of Economics, University of Mumbai, Kalina Mumbai - 400 098, India
     

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Financing of fiscal deficits through money creation and/or the subsequent monetisation of deficit can lead to inflation. Inflation is regarded as an alternative to explicit taxation and is resorted to as a source of substantial resources in many developing countries. This paper examines the concept of seigniorage and the extent to which the government in India has relied on this indirect tax form over the period 1952-2000. The computations indicate that till 1970 the government garnered less than 1 per cent of GDP as revenue from seigniorage while it has been in the range of 1-3 per cent of GDP in the period since 1971. Inflation tax revenue has also been at less than 1 per cent of GDP till 1963-64 and has been over 2 per cent of GDP in years of high inflation. Also, the rate of inflation at which inflation tax revenue is maximised works to 172.59 per cent. Also, viewing the relationship between seigniorage revenue and inflation tax revenue as a stockastic one, we see that more than half of the contribution to seigniorage revenues comes from the increase in the money-income ratio while inflation tax contributes only 54 per cent to changes in seigniorage revenues. Further, a preliminary estimate indicates that less than one-fifth of the fiscal deficit has been financed by money creation over 1952-2000.
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  • Government Revenue from Seigniorage and Inflation Tax:An Estimate for India 1952-2000

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Authors

Swati Raiu
Department of Economics, University of Mumbai, Kalina Mumbai - 400 098, India

Abstract


Financing of fiscal deficits through money creation and/or the subsequent monetisation of deficit can lead to inflation. Inflation is regarded as an alternative to explicit taxation and is resorted to as a source of substantial resources in many developing countries. This paper examines the concept of seigniorage and the extent to which the government in India has relied on this indirect tax form over the period 1952-2000. The computations indicate that till 1970 the government garnered less than 1 per cent of GDP as revenue from seigniorage while it has been in the range of 1-3 per cent of GDP in the period since 1971. Inflation tax revenue has also been at less than 1 per cent of GDP till 1963-64 and has been over 2 per cent of GDP in years of high inflation. Also, the rate of inflation at which inflation tax revenue is maximised works to 172.59 per cent. Also, viewing the relationship between seigniorage revenue and inflation tax revenue as a stockastic one, we see that more than half of the contribution to seigniorage revenues comes from the increase in the money-income ratio while inflation tax contributes only 54 per cent to changes in seigniorage revenues. Further, a preliminary estimate indicates that less than one-fifth of the fiscal deficit has been financed by money creation over 1952-2000.